NASD Proposes Rules on New Stock Offerings

By FLOYD NORRIS

Published: July 29, 2002

Acting long after the market has cooled, but at a time when public anger at Wall Street is high, NASD proposed new rules yesterday to bar some abuses in the initial public offering market and to make it easier for regulators to spot abuses.

''It puts the industry on notice as to what we see as the major abuses,'' said Robert R. Glauber, the chief executive of NASD. ''It is critical that investors have confidence in the integrity of the I.P.O. process.''

The new rules were put out for public comment and are likely to be adopted later this year after comments are considered.

The rules deal largely with abuses in the allocation of hot new offerings, by expressly prohibiting allocations in exchange for excessive commissions or unusually high payments for any investment banking service. Nor could an investment bank allocate shares based on a promise to buy additional shares after trading begins, a practice known as laddering.

NASD, which was formerly known as the National Association of Securities Dealers, has already viewed both practices as illegal under existing, more general rules. But with specific rules, said Mary Schapiro, the NASD president of regulatory oversight, ''It will be easier for us to enforce more expeditiously.''

In January, Credit Suisse First Boston agreed to pay $100 million in fines to NASD and the Securities and Exchange Commission for charging high commissions on new offerings in 1999 and 2000.

The new rules also ban ''spinning,'' the allocation of shares to officers or directors of other companies on condition that the recipient of the shares direct investment banking business to the firm. To help enforce that rule, any lead underwriter would have to disclose to NASD, but not to the public, allocations of initial offerings to officers or directors of companies within six months before or after the underwriter does investment banking business with the customer's company.

But the rule would not require the disclosure of other allocations that have sometimes seemed dubious. Some firms have let politicians in on hot new offerings. In other cases, companies going public have gained credibility because an established company was a customer, but it was not disclosed that officials of the established company were given shares in the offering.

Another rule would state that if a lead manager penalizes another member of the underwriting syndicate because that firm's customers immediately take profits by selling the shares, a practice known as flipping, the penalty must apply equally to flipping by institutional and retail investors.

During the bubble in new technology offerings, allocations of shares in hot offerings were a way to quick riches, and many new deals doubled or tripled in price the first day of trading.

Those days are long past, however. Of this year's reduced crop of new offerings, only three now trade for as much as 50 percent more than the offering price, while 52 are now trading below the offering price, according to Bloomberg Business News.